The CFPB takes another stab at the privilege waiver issue

One of the issues that we have discussed several times on this blog is the CFPB’s position with respect to privileged information it may request during examinations of supervised entities. As we have noted, the CFPB has taken the position that no waiver of the privilege has occurred when such information is provided, but its position on this issue has been called into question by the lack of any direct statutory support for the position it took.

Although there is a legislative “fix,” of sorts, pending in Congress now, the CFPB has now taken the step of issuing a proposed regulation to address the privilege waiver problem. Yesterday, it released a new proposed rule that would essentially create a regulatory equivalent of 12 U.S.C. §§ 1828(x) and 1821(t), which would allow the CFPB to demand privileged information from all supervised entities (not just banks, which were the only ones mentioned in Bulletin 12-01). Further, the proposed rule provides that no waiver occurs when the CFPB shares privileged information with any state or federal agency..

Unfortunately, while the proposed rule is sensible and hopefully will offer more protection to the entities supervised by the CFPB, it suffers from the same basic flaw as Bulletin 12-01: an “ends-justify-the-means” approach that pieces together a rationale from inferences and observations about what the law should be, together with an invocation of CFPB’s power to make rules under Dodd-Frank. The better approach would have been for the CFPB to take its cue from Congress and await a legislative solution to this issue, and await requesting privileged information until Congress acts, but it has decided instead to simply create a new law itself (compete with preemptive effect on state courts), modeling its proposed rule after §§ 1828(x) and 1821(t). This approach underscores the urgency with which the CFPB views its examination activity, and its approach to anything that might get in the way of performing such examinations in the manner it wishes.

There are a couple of other interesting things about the proposed rule:

Unlike Bulletin 12-01, which discusses only the attorney-client privilege, the new proposal explicitly mentions the work product doctrine. This signals the Bureau’s intent to request both attorney-client and work product materials from supervised entities.

The proposed rule applies to banks and non-banks alike, while Bulletin 12-01 only applies to banks subject to the Bureau’s supervision.

The proposed rule reiterates the promise of assistance made in Bulletin 12-01, in which the Bureau has stated that it will assist supervised entities in resisting claims of waiver asserted by third parties.

The proposed rule also underscores the intent of the CFPB to share privileged information with state agencies (including, presumably state attorneys general), stating that “[t]he coordinated intergovernmental action envisioned by Title X of the Dodd-Frank Act would be significantly hampered if the Bureau were not able to exchange privileged information with these agencies freely.” This raises an interesting question: will the MOU between the CFPB and state AGs prohibit the AGs from using privileged information in enforcement actions against supervised entities? It would seem to be required, because the CFPB’s proposed rule provides that there is no privilege waiver “as to any person or entity other than the CFPB.” Thus, it would seem, the CFPB could share privileged information with a state attorney general, but that AG would be unable to use that information in an enforcement proceeding, because under the CFPB’s proposed rule, the information would still be privileged as to the attorney general. This is of limited comfort, of course, because having a litigation adversary see privileged material strikes at the very heart of the purpose of the privilege, but at a minimum, the Bureau should demand that state attorneys general not use such information in any enforcement proceeding. When the proposed information-sharing MOU that Director Cordray mentioned in a recent speech to NAAG is released, that is one of the issues we’ll be interested in.

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